While many Americans associate the term “insider trading” with illegal activity, company insiders are free to buy and sell shares of their own company's stock, provided they follow disclosure laws.
Illicit insider trading occurs when a company insider trades after gaining meaningful non-public information about the company, or if an insider buys or sells shares of stock without disclosing the trades via Securities and Exchange Commission filings.
A Ramp In Insider Selling
Company insiders whose compensation includes shares of stock can’t be faulted for selling those shares and raising cash periodically. However, traders watch closely for changes in patterns or unusual insider trading activity.
CNN reported this week that insider selling has reached its highest level since 2007, a potentially bearish signal that high-level executives see trouble ahead for stocks.
Benzinga PreMarket Prep co-host Dennis Dick discussed how he approaches insider selling data on Wednesday morning’s show.
He distinguished two different types of insider selling, using Beyond Meat Inc BYND and Facebook, Inc. FB as examples.
“You see insider buys and insider sells all the time. If you see insider sells in something like Beyond Meat or something that’s really hot and you see a big sell, it can be indicative of something. It might mean something. It might mean some people want out at a really good price,” Dick said.
Insider Selling Mostly Noise
Facebook CEO Mark Zuckerberg’s insider selling doesn’t quite hold the same meaning, Dick said.
Zuckerberg recently sold 500,000 shares of Facebook stock. While 500,000 shares may seem like a lot of stock, it’s only a tiny fraction of the 390 million shares Zuckerberg still owns, the PreMarket Prep co-host said.
“He sold basically nothing. He could be going and buying a yacht. He could be going in and making an addition to his house. He could be donating to charity. He could be doing all kinds of different things with that money,” Dick said.
“If he sold like half of his position, that is something. If he sold 10% of his position, that is something ...500,000 shares sounds like a lot, but not when you have 350 million shares. It’s basically nothing.”
Pay Attention To Insider Buying
Yet Dick said it would be completely different if Zuckerberg had bought 500,000 shares.
While there are countless reasons for executives to sell stocks, Dick said there’s only one reason to buy.
“There’s only one reason you buy stocks — you’re speculating on your stock going higher," DIck said. "Executive buys move the price up often. Executive sells don’t move the price down very often."
Traders should often just ignore insider sales, unless they represent an extremely large portion of an executive’s total stake in the company, Dick said.
Insider buys, however, are very useful trading tools. For example, Emmaus Life Sciences Inc EMMA reported a large insider purchase Tuesday, and the stock was trading higher by nearly 11% at the time of publication Wednesday.
Insider buys can be particularly useful trading tools if they come after a prolonged downward trend, Dick said.
"When a stock is really in the dumpster ... and then you get some exec buys, that’s when the market takes note and that’s when you can see these stocks really turn."
Benzinga’s Take
Traders shouldn’t necessarily be spooked by reports of massive amounts of insider selling in the stock market.
Some of that selling is likely in response to the yield curve inversion earlier this month, but much of it is simply a product of stock prices being near all-time highs and record-high executive compensation, much of which is paid in shares of stock.
Do you agree with this take? Email feedback@benzinga.com with your thoughts.
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